[Analysis] Block Assessment Scheme under the Finance (No. 2) Act 2024

The block assessment scheme is a procedure for assessing undisclosed income discovered during a search or requisition. Introduced first in 1995, it allowed for assessing income over a block period of 10 years, later revised to 6 years. The scheme was replaced in 2003 by Sections 153A, 153B, and 153C and further integrated with reassessment provisions in 2021. The Finance (No. 2) Act, 2024, reintroduces the block assessment scheme, applicable to searches from September 1, 2024, assessing the total income for a six-year block period plus the period up to the Last date of authorisation of the search. This new scheme streamlines the process, ensuring consolidated and efficient assessments in search cases.

Table of Contents

1. Introduction
2. History of Assessment in Search Cases
3. New Scheme Introduced by the Finance (No. 2) Act, 2024
4. Computation of Total Income for the Block Period
5. Issues in the Computation of Total Income
6. Calculation of Tax on Block Period Income
7. Time Limit for Completion of Block Assessment

1. Introduction

The Finance (No. 2) Act, 2024, has introduced a new block assessment scheme applicable to search and requisition cases. This scheme applies to searches conducted on or after September 1, 2024, and mandates that the total income for the entire block period be assessed collectively.

2. History of Assessment in Search Cases

The concept of block assessment in search cases is not entirely new. It was first introduced by the Finance Act of 1995, which added Chapter XIV-B (Sections 158B to 158BH) to the Income-tax Act, effective from July 1, 1995. Under this scheme, undisclosed income was calculated for a block period covering ten previous years. The Finance Act of 2001 later revised the definition of ‘block period’ to encompass six previous years.

In 2003, the Finance Act brought an end to this special chapter by June 1, 2003, and introduced Sections 153A, 153B, and 153C. These sections required taxpayers to file returns for the six relevant assessment years. The Finance Act, 2017, further amended Section 153A, granting the Assessing Officer (AO) the authority to issue notices for assessment periods beyond six years, extending up to ten years, if evidence suggested that income exceeding Rs. 50 lakh, represented in the form of assets, had escaped assessment.

The Finance Act, 2021, then abolished this regime, integrating it with the reassessment provisions under Sections 147 to 151A, applicable to searches, surveys, or requisitions initiated or conducted on or after April 1, 2021. Under this regime, the AO could reassess income for up to three years. However, if information indicated that income exceeding Rs. 50 lakh, represented in the form of assets, had escaped assessment; the AO could issue a notice for a period extending up to ten years from the end of the relevant assessment year.

3. New Scheme Introduced by the Finance (No. 2) Act, 2024

The Finance (No. 2) Act, 2024 has reintroduced the block assessment scheme by replacing Chapter XIV-B (Sections 158B to 158BI) for cases where a search under Section 132 or a requisition under Section 132A is conducted on or after September 1, 2024. Under this scheme, the Assessing Officer is required to assess or reassess the total income of the concerned person in accordance with the provisions of the said Chapter.

The reintroduction of the block assessment scheme addresses the absence of a legal requirement for consolidated assessments in search cases, which previously allowed only the time-barring year to be reopened annually. This led to staggered search assessments, extending the process for up to ten years. The new block assessment scheme aims to streamline the assessment procedure, making it more cost-effective, efficient, and meaningful.

3.1 Summary of the New Block Assessment Procedure in Search (Search should be read as Search/Requisition) Cases

A. Block Period

i. For searches conducted on or after September 1, 2024, the total income for the block period will be assessed.
ii. The block period will consist of six assessment years preceding the previous year in which the search was initiated. For example, if the search is conducted on October 15, 2024, the block period will include assessment years relevant to the previous years, 2023-24, 2022-23, 2021-22, 2020-21, 2019-20, and 2018-19.
iii. The block period also includes the period starting from April 1 of the previous year in which the search was initiated and ending on the date the last authorisation for the search was executed.
iv. Any pending assessment or reassessment during the block period shall abate and be considered in the block assessment. If the block assessment is annulled on appeal, the abated assessment will be revived.
v. The block period for any “other person” involved in the search will be the same as that for the “person searched”.

B. Total Income

i. The total income (excluding undisclosed income discovered during the search) of the previous year in which the search was initiated shall be assessed independently under the normal provisions of the Act.
ii. “Undisclosed income” includes any money, bullion, jewellery, or valuable items, as well as any expenses or income entries in books of accounts or other documents or transactions representing income or property not disclosed for income-tax purposes. It also covers incorrect expense claims, exemptions, deductions, or allowances for the block period.
iii. The income for the block period will include the aggregate of returned income, assessed income, declared income, income determined for the current year, and undisclosed income determined by the Assessing Officer.
iv. Assessed losses or brought forward losses from the assessment years within the block period will be ignored for the block assessment but may be considered in subsequent regular assessments.
v. The total income for the block period shall be reduced by the returned income, assessed income, and income determined for the current year, and the remaining income is taxed under Section 113 at 60%.

C. Filing of Return

i. The Assessing Officer may issue a notice to file the return within 60 days, declaring the total income, including undisclosed income, for the block period.
ii. The return filed under Section 158BC will be treated as a return filed under Section 139, and assessment proceedings will be initiated under Section 143(2). Returns filed beyond the time allowed in the notice will not be considered returns under Section 139.
iii. There is no provision to file a revised return under this chapter.

D. Assessment

i. Once proceedings are initiated under this chapter, no proceedings under Section 148 shall be initiated.
ii. The assessment of the block period will be conducted according to the provisions applicable to the block period, including Sections 142, 143(2), 143(3), 144, 145, 145A, and 145B.
iii. Section 143(1) does not apply to assessments under this Chapter.
iv. The procedure under Section 144C (Dispute Resolution Panel) will not apply to proceedings under this Chapter.
v. The assessment for the block period must be completed within 12 months from the end of the month in which the last warrant of authorisation was executed.

E. Interest and Penalty

i. No interest under Sections 234A, 234B, or 234C or penalty under Section 270A will be levied on the assessee for undisclosed income assessed or reassessed for the block period.
ii. If no return is filed in response to a notice or is filed beyond the allowed time, interest will be charged at 1.5% of the tax on undisclosed income for each month or part of the month.
iii. The Assessing Officer or Commissioner of Income Tax (Appeals) may impose a penalty equal to 50% of the tax on undisclosed income. However, no penalty will be imposed if the return is filed by the person searched, tax is paid on the declared income, and no appeal is filed against the income declared in the return.

4. Computation of Total Income for the Block Period

Section 158BB outlines the method for computing the total income during a block period in the context of a block assessment. According to sub-section (1), the total income for the block period is determined by aggregating both disclosed and undisclosed income. However, sub-sections (5) and (6) of Section 158BB specify that disclosed income (excluding any losses) is deducted from the total income calculated under sub-section (1). This distinction is necessary because undisclosed income is taxed under Section 113 [as per Section 158BA(7)], while disclosed income is assessed separately under other provisions of the Act [as per Section 158BA(6)]. Thus, the computation of total undisclosed income for the block period involves a process where disclosed income is excluded from the total income to arrive at the undisclosed income.

The total income for the block period is computed as follows:

Notes [As per Section 158BB(6) and Section 158BB(7)]:

• If the income declared by the assessee or assessed in the hands of the assessee is a loss, it is ignored for the purpose of calculating total income.
• Losses brought forward from periods before the block period or unabsorbed depreciation cannot be set off against undisclosed income but can be carried forward for set-off in subsequent years.

5. Issues in the Computation of Total Income

5.1 Basis of Total Income When the Return of Income Has Not Been Filed

There are several scenarios where a return of income may not have been filed:

i. The previous year has not yet ended;
ii. The previous year has ended, but the due date for filing the return has not expired;
iii. The previous year has ended, the due date for filing the return has expired, but the return has not been filed.

The first scenario is addressed by Section 158BB(1)(iv), which states that in such cases, the total income determined will be treated as disclosed income and will be deducted when computing the total undisclosed income for the block period.

However, the new Section 158BB does not explicitly address the second scenario, where the previous year has ended, but the due date for filing the return has not yet expired. Previously, Section 158BA(3) provided that if the assessee could prove to the satisfaction of the Assessing Officer that any part of the income related to an assessment year for which the due date for filing the return had not expired, and such income was recorded on or before the date of the search or requisition in the books of account, that income would not be included in the block period. In the absence of a similar provision in the new Section 158BB, it may be argued that if an assessee files a return under Section 139(1) for such a period, the income disclosed in that return could be considered disclosed income.

For the third scenario, where the previous year has ended, the due date for filing the return has expired, but the return has not been filed; the new Section 158BB does not explicitly address this situation either. Under the old Section 158BB(1)(ca), the approach was that if the due date for filing the return had expired, the disclosed income was considered ‘nil,’ and the income disclosed in the Section 158BC return was treated as undisclosed. Therefore, in the absence of explicit provisions or prohibitions, if an assessee files a belated or updated return under Section 139(4) or Section 139(8A) for such a period, the income disclosed in that return may be considered disclosed income. If the return is not filed, the income related to such an assessment year would be considered undisclosed income.

These interpretations are not without ambiguity, and tax authorities may take a different view. It is recommended that a suitable amendment be made to clarify these situations.

5.2 Basis of Total Income When the Return Has Been Filed and Adjustments Are Made Under Section 143(1)

When calculating the total income for the block period, the assessed income from previous years is considered if the assessment under Sections 143(3), 144, 147, 153A, or 153C was concluded before the initiation of the search [Section 158BB(1)(ii)].

It is important to note that only assessed income from these specified sections is used to compute the total income for the block period. However, adjustments made to total income under Section 143(1) are not considered as assessment[2]. This raises the question of whether such adjustments should be included in the total income for the block period, either as undisclosed or disclosed income.

In the absence of specific provisions in the new chapter, it could be argued that such income should be treated as undisclosed income, except when the adjustment was made due to arithmetical errors, regardless of whether it is disclosed in the return filed under Section 158BC.

5.3 Chapter VI-A Deductions and Exempt Income

Section 158BB(6) states that any loss declared in the return or assessed shall be ignored, and Section 158BB(7) prohibits the set-off of brought-forward losses against undisclosed income determined in the block assessment. However, Chapter XIV-B is silent on the treatment of deductions under Chapter VI-A in the computation of total or undisclosed income for the block period.

One view is that Chapter VI-A deductions should be allowed when computing total income. However, another interpretation suggests that since the chapter does not permit the benefit of losses or depreciation, the intention may be to disallow deductions under Chapter VI-A as well.

However, this restriction does not affect exemptions provided under Chapter III or IV, such as Sections 10, 10A, 10B, 54, 54F, etc., which remain applicable.

6. Calculation of Tax on Block Period Income

Sub-section (7) of Section 158BA mandates that the total income for the block period shall be taxed at the rate specified in Section 113, regardless of the previous year or years to which the income relates.

As amended by the Finance (No. 2) Act, 2024, Section 113 prescribes a tax rate of 60% on the total income of the block period determined under Section 158BC. Additionally, this tax is subject to any surcharge that may be imposed by a Central Act.

6.1 Surcharge on Tax for Block Period Income

The tax levied under Section 113 is subject to an additional surcharge, if any, as imposed by any Central Act. Currently, neither the Finance Act, the Income-tax Act, nor any other Central Act specifies a surcharge for income assessed under Section 113. This is confirmed by the memorandum explaining the provisions of the Finance (No. 2) Bill, 2024.

However, this raises a question: even though no specific surcharge is mentioned for income taxable under Section 113, could the surcharge rate specified for income under Section 115BBE be applied to the total income of the block period, particularly for undisclosed income?

Here, Section 158BH is relevant, as it governs the applicability of other provisions of the Act to block assessments. It states:

“Save as otherwise provided in this Chapter, all other provisions of this Act shall apply to assessment made under this Chapter.”

Section 158BH begins with “Save as otherwise provided in this Chapter,” indicating that while all other provisions of the Act apply, they are subject to the specific provisions in this chapter. Therefore, the provisions within the block assessment chapter take precedence over all other provisions of the Act[3]. Since Section 158BA specifically refers to Section 113 for determining the tax rate on block period income, Section 115BBE does not apply in this context.

6.2 No Health and Education Cess on Tax for Block Period Income

The Health and Education Cess is imposed under the authority granted by Sections 2(11) and 2(12) of the Finance (No. 2) Act, 2024. These provisions allow for the levy of cess on tax computed under sub-sections (1) to (3) and sub-sections (4) to (10) of Section 2, respectively. However, none of these sub-sections addresses the computation of tax on income taxable under Chapter XIV-B. Consequently, the tax computed on block period income will not be subject to the Health and Education Cess.

7. Time Limit for Completion of Block Assessment

Section 158BE mandates that the order under Section 158BC must be issued within twelve months from the end of the month in which the last authorisation for a search under Section 132 or requisition under Section 132A was executed or made. However, this time limit may be extended under certain circumstances.

[1] ‘Current year’ refers to the previous year starting from 1^st April of that previous year till the date on which the last authorisation for the search or requisition is made.

[2] ACIT v. Rajesh Jhaveri Stock Brokers (P.) Ltd [2007] 161 Taxman 316 (SC)

[3] DCIT v. Western India Cashew Company (P.) Ltd., (2015) 61 taxmann.com 306 (Chennai – Trib.)